State factors which determine price elasticity of demand.

The following are the main factors which determine the price elasticity of demand for a commodity.

1.    Number of close substitutes of a good. Demand for a commodity which has a large number of its substitutes is usually elastic. Pepsi, Limca, Coca-Cola, Rooh Afza are good substitutes for each other. Demand for any of them, say, Pepsi, is likely to be highly elastic due to availability of its close substitutes. If a good has less number of close substitutes, its demand will be less elastic, e.g., electricity. Similarly demand for salt is inelastic since it has no close substitutes. In short more the number of close substitutes of a good, higher is elasticity of demand of that good.

2.    Number of uses of a commodity. More the number of uses of a commodity, more is e_D of that good. Thus demand for a commodity which has many uses is generally elastic, e.g., demand for electricity, milk, petrol etc. On the other hand if commodity has a few uses (like butter), its demand is likely to be inelastic.

3.    Proportion of income spent on a good. More the proportion of income spent on a good, more is e_D of that good. Demand for a commodity is inelastic if proportion of income spent on that commodity is very small, e.g., demand for needles, matchboxes etc. On the other hand, if expenditure on a commodity forms a large proportion of consumer's income, its elasticity is likely to be high, e.g., demand for clothes, Scooters etc.

4.    Level of prices. Demand for a good at higher level of price is generally more elastic than for good at lower level of price. For example, demand for inexpensive or Iow priced articles like matchboxes, pencils, combs etc. is inelastic. On the contrary, demand for high priced goods like cars, TVs, ACs etc. is usually elastic because change in price affects the consumer's budget greately.

5.    Level of income. If income level of consumer is high, change in price will not affect the quantity demanded of most of the commodities, i.e. elasticity of demand will be low for most of the goods. But if income level is low, elasticity of demand for most of the commodities will be very high. For instance if price of a good rises, a rich consumer is not likely to reduce the demand than a poor consumer.

6.    Tastes, preferences and habits of consumers also determine change in their demand for commodities. For example, a chain-smoker will not restrict his smoking even at a higher price.

7.    Nature of goods. A good for a person may be a necessity or a comfort or a luxury. (i) Necessities of life have inelastic demand, since they are to be purchased even though their prices go up, e.g. demand for food, textbooks etc. Thus more necessary the good for a consumer, less elastic is the demand. (ii) As against this, demand for luxuries is generally more elastic, as they are high price goods, e.g. demand for T.V. sets, Air-conditioners, cars etc. (iii) However demand for comforts like fan, cooler, radio etc. is generally elastic as a consumer can postpone its consumption.

8.    Miscellaneous. Nature of use of a commodity (coal for cooking or heating of room), jointly demanded goods, possibility of postponement, short or long period etc. are some of the other factors that affect elasticity of demand.